An overview of the process and what to expect as a buyer
By Dan Mullarkey, Associate Broker with West USA Realty
So, you're in the market for a home and you've heard the buzz about the tremendous deals available on REOs. First off, you're asking yourself what is the heck is an REO? This is a term that you will hear often when discussing foreclosures and the next section will explain what this term means.
REO is an acronym meaning "Real Estate Owned", a shorthand term for a foreclosed property. This is a property that was previously mortgaged and has reverted back to the bank after an unsuccessful foreclosure auction. REO is not a term that banks want to see on their books because after all, they are in the business of lending money for homes, not managing them.
Many of these properties do not sell at an auction for several reasons. First, the property usually does not have any equity to satisfy the loans and liens, as many homes bought over the past few years have negative equity. Most foreclosures do not even receive a bid because the minimum bid includes the loan balance, attorney fees, any accrued interest and all costs associated with the foreclosure process. To even bid on these properties, you need a cashier's check in hand, ready to go, for the full amount of your bid. If you are the winning bidder, you receive the property in complete "as-is" condition-meaning someone could be still living in the home, other outstanding liens against the property, and possible structural or environmental issues with the home that could cause enormous problems for you later.
Since in today's market most people who purchased in the last few years are upside down in their homes, very few of these auctions are successful. After all, if the owner had equity in the home, they would have sold it versus foreclosing. If the auction is unsuccessful, then the property reverts back to the bank. It is now referred to as a REO, and the bank wants it gone ASAP.
Now It's an REO, What's Next?
So now the bank owns the property and the previous mortgage loan is gone. Next issue is, "How does the bank sell their REOs?" Most banks hire an outside company, called a Default or Asset Management Company to handle the sale of the property. These companies usually take a percentage of the commission that they give to a local real estate broker or agent to sell the property. That broker in turn offers the buyer's agent a portion of the sale, same as any other real estate transaction. The Default Management Company employs asset managers who may manage several hundred properties at once, in many different states. The local REO agent is their eyes and ears to the sales process and has many duties to make sure that the property is in saleable condition and being marketed aggressively.
The listing agent is in charge of arranging cleanup and even eviction if the former owner or a tenant is still occupying the property. After the home is vacant and cleaned up, the agent turns in their BPO (Broker's Price Opinion) which is similar to an appraisal but completed by a Realtor to give the bank an idea of what the home will sell for. Finally, the home is listed on the local MLS and ready for offers.
Offer Received!
Once an offer is received, the bank may take several days to respond. It is customary with some banks to always counter the offer, even if received at full price---this practice is diminishing though as in many areas banks are competing with other REOs and becoming more motivated to sell. As a general rule of thumb, the longer the home has been on MLS, the more motivated the bank is to sell it at lower than list price. If more than one offer is received, the bank may request a "Highest & Best" from all parties- meaning that each buyer has 24 hours to submit their best offer, not knowing where the other offers stand. This is difficult situation for buyers and another reason to be working with an experienced REO agent to help advise you on how to proceed.
Offer Accepted!
Okay, so the bank has accepted your offer and now it's time to order inspections, right? Well, it might take a few days to get the contract signed by the bank, even after you have an acceptance. During this time, they usually have a policy where they can still look at and accept other offers. So again, make sure your Realtor is working to get the contract signed ASAP, otherwise you could still lose out on the home. The bank will most likely have their own addendum to the purchase contract which supersedes the contract you submitted, SO READ IT CAREFULLY!!! They may change terms such as: length of inspection period, contingencies, per diem charges if buyer does not close on time, seller performance, seller concessions and various other items. The main purpose of the addendum though is to release the seller from any liabilities and warranties of the home since they have never occupied it. When buying from a traditional seller, the buyer is given a disclosure statement-with REO you will never see one.
Inspect, Inspect, Inspect!!!
I ALWAYS recommend getting a professional home inspection, no matter the age or condition of the property. This can be even more important with REO as items not seen with the naked eye may be huge problems in the future. Remember, you are not limited to just a general home inspection...you can use a roof inspector, HVAC specialist, plumber; whoever you feel will give you the best advice for the specific mechanics of the home. Home inspectors are not roofers or HVAC specialists, so their scope can be limited on some items. Get the inspections done early and quickly as time is of the essence, some banks limit the inspection period to 5 or 7 days.
As-Is, or Is It?
True, REO is sold As-Is at the time of purchase unless noted otherwise. But what if the A/C is inoperative or a leaky roof is discovered? Many banks will fix the mechanics of the home to qualify it for financing, especially now with FHA being used so often.
What if you have a laundry list of issues that are discovered that were unknown at the time of contract? Depending on the demand for the home and the length of time it has been listed, some banks will either make additional repairs or credit the buyer for repairs. Again, this is where an experienced REO agent comes in handy. They can truly save you money and negotiate with the bank to make the home acceptable to you. After all, the parties involved in the transaction want to see it close just like any other home, and you as the buyer may have more leverage than you think.
Loan Docs Are In, Ready To Close
After the bank has made any necessary repairs (the appraiser may need to visit the home again to confirm), the closing process is pretty much the same as any other home. Escrow length is typically 30-45 days but can be quicker depending on the buyer---I've closed cash deals in under a week and financing in less than 3 weeks. The seller usually signs the closing docs fairly quickly. Once the buyer's loan funds and records, the home is yours! Now it's time to get moving and go enjoy your new home!
A few things to remember about REO:
•1) Contrary to late night infomercials, they are not sold for pennies but are usually priced aggressively for a quick sale and can be a great bargain.
•2) It may take some time to get an acceptance, so patience is a virtue.
•3) Working with an experienced REO buyer agent does not cost the buyer and can save time, headaches and money.
•4) Fully inspect the property as they are typically sold As-Is.
•5) Many REO listing agents deal in volume and may have hundreds of properties listed. Their interests lie in selling as many REOs as quickly as possible so working in the buyer's interest is not a priority---one more reason to use a REO buyer agent.
REOs can be a tremendous value but there are many things to consider. Working with an experienced agent can help guide you through the potential pitfalls and is absolutely a vital asset when considering these types of properties.
For more information or to search Phoenix Area homes, please visit www.DanMullarkey.com
Copyright 2008 Dan Mullarkey, Re/Max Excalibur Realty
